Accepting rural real estate as collateral can provide greater security for credit transactions, but requires due diligence beyond the property’s market value. Title, environmental, land tenure, and regulatory issues may undermine the enforceability of security interests and hinder credit recovery.
We highlight 5 key considerations for creditors:
1. Property title and registration: Creditors should verify ownership, the chain of title, existing liens, encumbrances, and disputes, as well as compliance with georeferencing requirements and rural property registrations, including CCIR, ITR, and CAR, as applicable.
2. Environmental and land tenure risks:Environmental liabilities, regulatory restrictions, permanent preservation areas, legal reserves, agricultural leases, and possession disputes may affect the property’s value, marketability, and enforceability as collateral.
3. Protection of small family-owned rural properties: The Brazilian Constitution protects small rural properties worked by the family against seizure under certain circumstances. Depending on the facts and the type of security interest, this protection may prevent foreclosure, even when the property has been voluntarily pledged as collateral.
4. Restrictions applicable to foreign creditors: Brazilian law imposes limits on the acquisition of rural land by foreign investors and Brazilian companies under foreign control. However, Law No. 13,986/2020 provides exceptions for the creation of security interests, including fiduciary transfers of ownership, and the acquisition of property through enforcement of collateral. Creditors should carefully assess the transaction structure and applicable registration requirements.
5. Liquidity and enforceability of collateral: Beyond market value, creditors should assess the property’s location, accessibility, agricultural potential, and potential enforcement costs. The choice between a mortgage and a fiduciary transfer of ownership may also significantly affect the timing and effectiveness of credit recovery.
The strength of rural real estate collateral depends not only on the property’s value, but also on its legal standing and practical enforceability. Thorough due diligence is essential to mitigate risks, preserve security rights, and improve credit recovery prospects.
